Banking queries

Can I take a home loan from a relative? I heard that only the interest component will be considered for exemption from taxes. What documents will be required for this?

—Durgesh Mahajan

I had taken a home loan of Rs20 lakh from Central Bank for 20 years at an interest rate of 9%. Currently, I hold a surplus amount of Rs10 lakh. There is no penalty in case of prepayment of a home loan. The current fixed deposit interest rates are around 10%. What should I do with my surplus amount? Should I prepay my loan or should I keep it in a fixed deposit since it will offer me 10% interest?

—Supkat

Prepayment will help you reduce the home loan burden in terms of EMI or tenure. You can check the “should I prepay my loan" calculator on loan websites to calculate if it makes sense for you to prepay the loan.

Also, while home loans are calculated on the basis of monthly reducing balance, fixed deposits (FDs) are compounded quarterly. If you do reverse calculation on a home loan, the interest is being compounded monthly. So, more interest will be accumulated in the case of home loans than with FDs. Also, prepayment of loan or investment in the FD will have tax implications, so it may not remain at 10% per annum.

You may find it more appropriate to prepay the home loan to reduce the interest payable on the loan in the long term. However, if you want a detailed calculation, please use the calculators on the loan websites.

INSURANCE

I want to invest Rs30,000 annually in a unit-linked insurance plan (Ulip). How should I choose a good plan?

—‘Investorritwik’

A Ulip would be good for you only if it fulfils your requirement. Your risk appetite should be the deciding criterion in choosing the plan. For instance, if you have a high risk appetite, an aggressive investment option with a higher equity component is more suitable for you. Compare products offered by various insurance companies on parameters such as expenses, premium payments, lock-in period, among others. Compare the Ulips’ performance: Find out how the debt, equity and balanced schemes are performing.

Also, study the portfolios of various plans. Expenses are a major factor in Ulips, hence assess this parameter as well. Ask about the top-up facility offered by Ulips. Find out about the number of times you can make free switches (changes in the asset allocation of your Ulip account) from one investment plan to another. Some insurance companies offer multiple free switches every year while others do so only after a stipulated period.